The United States of America, acting under the direction of

action to enjoin defendants Long Island Jewish Medical Center

("LIJ Medical Center" or "LIJ") and North Shore Health System("North Shore") from forming a third corporation that would

jointly negotiate prices and other competitively sensitive terms

for defendants and to obtain other equitable relief against thesedefendants.

1. North Shore University Hospital at Manhasset ("North

Shore Manhasset") and LIJ Medical Center are each other’sprincipal competitor by virtue of their premier reputations,

comparable full range of high quality services, and their

strategic location for serving Queens and Nassau Counties. Bothare profitable, high occupancy hospitals that can continue to

pursue their missions successfully if they remain independent.

They compete head-to-head to be "anchor" or "flagship" hospitalsin the networks of Long Island hospitals assembled by managedcare companies to provide health care to employers, individuals,families, and other purchasers. The proposed transaction wouldeliminate this beneficial competition. 2. Consumers buying managed care plans and living in LongIsland, particularly in Queens and Nassau Counties,overwhelmingly want the option to go to either North ShoreManhasset or LIJ Medical Center if they become ill and requirehospitalization. Even if Long Island residents might be willingto use other hospitals for certain procedures, they strongly

desire the up-front option to be able to use these two premier

hospitals. Managed care plans, therefore, must include either ofthese two hospitals in any network that covers Queens and Nassau

eliminate inefficiency, and providing high quality care.

approach, competitive prices, and high quality services,

recognizing that: [T]he partnership between managed care companies and providers . . . will ultimately be best for the consumer community.

2(Position paper from Joseph Drohan, LIJ Vice President NetworkDevelopment & Managed Care, to LIJ President and Chief ExecutiveOfficer ("CEO"), David Dantzker, dated March 28, 1996). 5. On the other hand, North Shore seeks to "create marketpower through economic integration and joint contracting . . .. "(emphasis added)(Letter from Peter Stamos, a consultant to NorthShore who has also served as a North Shore Senior Vice Presidentfor Strategic Planning, to Jackson Hole Group, Oct. 11, 1995).As LIJ Medical Center itself has observed:

North Shore[’s] position is not

conducive to reducing medical costs on Long Island: 1. North Shore is not supportive of partnerships with managed care organizations and has used its hospital acquisition model as a method of banding against managed care organizations to keep medical costs on Long Island at a high level.

(emphasis added) (Position paper from Joseph Drohan, LIJ Vice

President Network Development & Managed Care, to LIJ Presidentand CEO, David Dantzker, dated March 28, 1996).

6. Unless blocked, the competitive pricing managed care

plans have been able to negotiate because of the rivalry betweenLIJ Medical Center and North Shore Manhasset will be eliminated.

The hospitals know this will be the impact of the transaction.

Indeed, minutes reporting on a presentation by LIJ’s Presidentand CEO David Dantzker at a recent meeting, expressly recognizethe impact: "Amalgamation [with North Shore] will free bothhospitals from the stress of competition." This combination

3would thus likely result in higher prices and would remove aprincipal incentive for these hospitals to eliminate inefficiencyin their operations. I. JURISDICTION AND VENUE 7. This action is filed under Section 15 of the Clayton

offices, and are found within the Eastern District of New York. 9. The defendants are engaged in interstate commerce andin activities substantially affecting interstate commerce. Inproviding inpatient hospital services, both defendants regularlyreceive substantial payments from outside New York from grouppurchasers and purchase equipment and supplies from outside New

York. II. THE DEFENDANTS

10. North Shore, one of the largest hospital systems in the

northeast, has grown through purchase or affiliation, as opposedto internal growth or expansion. Over the last two years, NorthShore went from two hospitals (with 950 beds) to nine hospitals(with over 3,400 beds) in Queens and Nassau Counties and on

4Staten Island. At the same time, North Shore’s annual revenueincreased from $474 million to $1.8 billion. North Shore’sflagship hospital and the largest of its nine hospitals is NorthShore Manhasset, a large, highly sophisticated, well known, andprestigious teaching hospital affiliated with the New YorkUniversity School of Medicine and located two miles away from LIJMedical Center. North Shore Manhasset has 729 acute, non-psychiatric inpatient licensed beds and had acute inpatient, non-psychiatric net revenue in 1996 of about $400 million.

11. LIJ Medical Center is a large, highly sophisticated,

well known, and prestigious teaching hospital affiliated with theAlbert Einstein College of Medicine and located in Queens County,

million in 1996. One of the cornerstones of LIJ’s strategic

plan, according to LIJ President and CEO David Dantzker, has been the development of effective relationships with managed care organizations. LIJ has a demonstrated ability to attract managed care contracts and referrals because of its strategic Queens/Nassau location and premier academic and medical care reputation.(Attachment to Dec. 27, 1995 letter from LIJ President and CEODantzker to Ted Jospe, President, Southside Hospital).

5 III. TRADE AND COMMERCE A. HOSPITAL COMPETITION IN NEW YORK 12. The State of New York has recognized and promoted thebenefits of competition among hospitals. In the past, the Statehad closely regulated hospitals’ prices for inpatient care. In

1983, it imposed a regulatory scheme called the New York

Prospective Hospital Reimbursement Methodology ("NYPHRM"). Sincethen, it has moved in two steps to eliminate regulation ofhospital rates and to promote price competition as a means oflowering the cost and improving the quality of health care in NewYork State.

13. In 1991, the State took the first step toward

eliminating this regulatory structure and promoting pricecompetition among hospitals by allowing a type of managed care

plan, health maintenance organizations ("HMOs"), to negotiate

prices with hospitals. The rates hospitals charged to all otherhealth insurance plans, however, remained subject to regulation

under NYPHRM. 14. Effective January 1, 1997, the State took its secondstep to eliminate NYPHRM and promote competition among hospitals.In September, 1996, New York enacted legislation that, accordingto Commissioner of Health Barbara A. DeBuono, M.D., "will improveaccess to high quality cost-effective health care for all NewYorkers" by converting "the decades-old state hospital financingsystem from one regulated by government to one based on free

6market competition." Effective January 1, 1997, as in 48 otherstates, all managed care companies can contract in New York withhospitals to determine hospital prices, a development thatCommissioner DeBuono has characterized as "a change experiencehas shown will lead to greater operating efficiency and lowerhealth care costs." 15. Competition among hospitals and other health careproviders--as opposed to price regulation--is important to ensureappropriate use of health care services and to control costs.

Historically, health care financing mechanisms such as private

unnecessary uses of health care, resulting in extremely high

rates of inflation in the cost of health care services. 16. In place of those non-competitive financing approaches,

employers, unions, and governmental bodies that provide insurance

for the individuals and families (collectively "grouppurchasers") on Long Island, and elsewhere, are relying

increasingly on a variety of managed care plans--such as

preferred provider organizations ("PPOs"), HMOs, and point ofservice plans ("POSs")--that contract with hospitals and other

providers on competitive terms to provide quality health care to

their members ("enrollees") and their families. 17. Managed care companies compete by developing andselling plans primarily on the basis of the breadth and qualityof their networks and on the basis of their premiums and benefits

7structure. In significant part, group purchasers and theirindividual and family members essentially purchase access to aprovider network that will provide them with a menu of physicianand hospital options if diagnosis or treatment is required.Managed care companies, therefore, generally try to offer anetwork with a broad range of attractive, convenient physicianand hospital services. Since group purchasers generallyrepresent many individuals and families with diverse tastes andneeds, a managed care company, to successfully market a plan,

must provide an even broader menu of provider options than would

be desired by an individual enrollee. B. COMPETITION BETWEEN NORTH SHORE AND LIJ MEDICAL CENTER 18. To be attractive to group purchasers and theirindividual and family members, managed care plans on Long Islandinclude in their networks a range of different hospitals that

enrollees know they can use in the event of future illness. Theyinclude in the network numerous community hospitals that providevery convenient locations and are typically used for more

routine, less complex cases. A more limited number of hospitals

are candidates to serve as anchor hospitals, so as to provideenrollees with the option to use a reasonably convenient hospitalthat has a prestigious reputation and offers an extensive rangeof high-quality services. The premier reputation andaccessibility of the anchor hospitals in such networks is vital

to enhance the marketability of a plan to group purchasers and

individuals. For example, LIJ’s Vice President of Strategic

8Planning, Jeffrey Kraut, has referred to LIJ as "the tertiarycare anchor" for a network of community hospitals on Long Island. 19. Hospitals compete for inclusion in managed care plans’networks on the basis of quality, customer service, location,rates, and cost-effectiveness. Competition among hospitals forinclusion in those networks has lowered, and will continue tolower or constrain, the cost of health care services, ultimatelylowering the costs to consumers and taxpayers, while continuingto make high quality health care available.

20. North Shore Manhasset and LIJ Medical Center are eachother’s closest competitor for the function of an anchor hospitalserving Queens and Nassau Counties in a managed care plan’s

hospital network, for several reasons. Each offers a broad array

of sophisticated services, a similarly broad and high qualitymedical staff, the prestige of their academic affiliations and

research programs, and a strategic location that make them the

only alternatives for the anchor of a plan serving theseCounties. The defendants’ own documents depict North Shore

Manhasset and LIJ Medical Center as the two highest-quality

institutions on Long Island and the premier institutions in thetri-county area of Nassau, Suffolk, and Queens.

21. Inclusion of either North Shore Manhasset or LIJ

Medical Center (and physicians from their medical staffs) in aplan’s provider network signifies quality and is thus key to themarketability of the plan to New York metropolitan area employersand other group purchasers who desire a network serving Queens

9and Nassau Counties. Inclusion of either one of these hospitalssignals the quality of the plan and gives enrollees and theirfamilies the option of receiving, if necessary, a full range ofacute care inpatient services at a highly regarded, convenientlylocated, premier hospital. Thus, most managed care plans servingLong Island currently include one or both in their providernetworks. 22. When negotiating, managed care plans currently have achoice of either North Shore Manhasset or LIJ Medical Center.

Because there is a choice, a plan has the ability to contract

with only one of those two hospitals--and exclude the other fromits network--as some plans have done.

23. The nature of this competition is well understood.

LIJ’s President and CEO David Dantzker observed in one memorandumthat a managed care plan called HealthFirst "has a significant

need for a tertiary care hospital in the western Nassau/Queens

area, and will contract either with us or with North ShoreHospital, but not with both." (Memorandum from Dr. Dantzker to

Irving Schneider, Chairman of the LIJ Board, and Gedale Horowitz,

Chairman Elect, February 8, 1995). And, at a March, 1996,meeting of the LIJ Board of Trustees, "Dr. Dantzker predicted the

eventual development of two networks in the Queens-Long Island

area -- one coalescing around North Shore and the other aroundthe [LIJ] Medical Center." Indeed, LIJ Medical Center hascompeted aggressively for inclusion in managed care plans. Forexample, an internal North Shore memorandum, detailing managed

10care contracting status and issues, reports concerningcontracting with an HMO: "Apparently, LIJ substantially underbidus for the core network; therefore we are currently being offeredinclusion in just the broad network." (North Shore InternalCommunication from Stuart McLean, December 1, 1994). 24. This competition has lowered defendants’ prices, whileallowing them to operate profitably and at high occupancy levels.Thus, in transmitting LIJ’s 1997 budget to LIJ’s FinanceCommittee, Rick Annis, LIJ Vice President for Finance, noted the

"favorable results" of LIJ’s "greater emphasis on cost-effective

management," and from LIJ’s "becoming a major player in managedcare. . . ." According to Annis, LIJ was "prepared for the

market driven, cost conscious health care environment."

25. LIJ Medical Center and North Shore Manhasset have takensteps independently during the last few years to lower their

costs and made plans for additional steps to reduce inefficiency

in their operations. The consumer benefits resulting fromcompetition between North Shore Manhasset and LIJ Medical Center

demonstrate the soundness of New York’s policy decision to

promote competition among hospitals. 26. None of the community hospitals that dot Long Island,

standing alone or in combination with more prestigious hospitals

in Manhattan or Suffolk, are good substitutes to North ShoreManhasset and LIJ Medical Center as anchor hospitals for plansserving Queens and Nassau Counties. None of the other hospitalsin Queens or Nassau County has the requisite combination of the

11range and sophistication of services, the complementary medicalstaff, and the necessary reputation to be a good substitute forNorth Shore Manhasset or LIJ Medical Center as an anchor hospitalfor a plan’s network. Hospitals in Manhattan and in SuffolkCounty are too far away and therefore are also not goodsubstitutes for LIJ and North Shore Manhasset in plans servingNassau and Queens Counties. Indeed, LIJ considered one of theManhattan teaching hospitals a good potential merger partnerbecause, in the words of Gedale Horowitz, Chairman of LIJ’s

board, LIJ and that Manhattan hospital did "not compete forpatients on a geographic basis." C. PAST ANTICOMPETITIVE PRACTICES 27. The proposed transaction would substantially furtherNorth Shore’s longstanding efforts to obtain supra competitiveprices. In 1991, when the State took its first step toward

eliminating rate regulation for hospital services by permitting

HMOs to negotiate hospital prices, North Shore orchestrated anagreement to prevent discounting with six other Long Island

hospitals through a joint bargaining agent that they formed,

called Classic Care Network, Inc. ("Classic Care"). The UnitedStates Department of Justice sued Classic Care, North ShoreManhasset, and the other participating hospitals, resulting in aconsent judgment that this Court entered on May 1, 1995,enjoining implementation of the agreement.

28. In the wake of Classic Care, on June 29, 1995, Peter

Stamos, who has served as a consultant to North Shore and as

12North Shore’s Senior Vice President for Strategic Planning, gavea presentation on North Shore’s strategic plans. LIJ’s VicePresident of Network Development and Managed Care, Joseph Drohan,attended and reported to LIJ’s President and CEO, David Dantzker,that: The [North Shore] network is intended to preclude HMOs from leveraging hospitals and physicians against each other. Mr. Stamos shared his California experience where hospitals and physician groups were ‘picked off’ when not tied to one cohesive network. * * * Mr. Stamos suggested this as a long term strategy, similar to the ‘Classic Care’ network that was disbanded in response to an anti-trust complaint by the Department of Justice. 29. Indeed, in May, 1996, LIJ Medical Center told other

Long Island hospitals that they should join with LIJ to present"a strong and ‘friendly’ alternative to [the] North Shore network. . . for physicians and HMOs." LIJ explained, "Physicians and

HMOs need an alternative to the acquisitive and ‘exclusivity-

based’ North Shore System." D. RELEVANT MARKETS 30. The relevant product market for analyzing defendants’proposed transaction for antitrust purposes is anchor hospitals.Anchor hospitals serve two specific functions for managed careplans. First, they allow the plan to offer its enrollees theoption of inpatient treatment at a hospital that has a broadarray of sophisticated services, a similarly broad and high

quality medical staff, and a prestigious reputation. Second, and

13relatedly, inclusion of the anchor hospital signals the overallquality of the plan to group purchasers and individuals andfamilies. Together, these two functions substantially enhancethe marketability of these plans. 31. The relevant geographic market for analyzingdefendants' proposed transaction for antitrust purposes is thearea within Queens and Nassau Counties where managed care planscould look for an anchor hospital that would be a good substitutefor LIJ or North Shore Manhasset. Anchor hospitals that are

reasonably convenient for enrollees substantially enhance the

perceived quality and marketability of a plan. Plans will failto provide that reasonably convenient access to large segments of

Queens and Nassau Counties if they were to offer a network

including only anchor hospitals situated outside of Queens andNassau Counties.

IV. LIKELY ANTICOMPETITIVE EFFECTS 32. If the proposed transaction is consummated, LIJ MedicalCenter and North Shore Manhasset will cease to compete for thebusiness of managed care health plans. Instead, the defendantswill concertedly establish higher prices and otheranticompetitive terms for health care purchasers. Given the lackof good substitutes for these two anchor hospitals, managed careplans will be deprived of their ability to obtain competitive

rates and other terms from defendants, including terms that areaimed at reducing the incidence of medically unwarranted

14procedures that inflate health care costs and undermine thequality of patient care. In short, as listed in an LIJ documentas a reason to merge, the proposed transaction [g]ives both parties more negotiating power with the managed care organizations. There is no longer the threat of going ‘down the street’ to the competition. 33. Moreover, if the challenged transaction were to goforward, then no managed care plan serving Queens and NassauCounties could assemble an attractive hospital network withoutincluding all North Shore hospitals. Significantly, the plans

would lose the option of using a competing network that includes

LIJ Medical Center as an independent anchor hospital and otherhospitals unaffiliated with North Shore. Thus, the proposed

transaction is likely substantially to reduce competition among

community hospitals. If the proposed transaction were to beconsummated, what was once a concern of LIJ Medical Center would

ironically well characterize the likely effects of this

transaction: "North Shore has created a non-competitiveenvironment by limiting the insurers access to multiple hospital

systems." (Position paper from Joseph Drohan, LIJ Vice President

Network Development & Managed Care, to LIJ President and CEO,David Dantzker, dated March 28, 1996).

V. VIOLATION ALLEGED 34. The proposed transaction between North Shore and LIJMedical Center would eliminate competition between North ShoreManhasset and LIJ Medical Center to serve as anchor hospitals in

15a managed care plan’s network. The transaction would thussubstantially reduce the ability of managed care plans, seekingto offer marketable provider networks on Long Island, to bargainwith North Shore Manhasset and LIJ Medical Center for competitiveprices and other competitively significant contractual terms.The proposed transaction, therefore, would combine North ShoreManhasset and LIJ Medical Center and likely result in an increaseof the prices at which they contract with managed care plans foracute inpatient hospital services and will deprive those plans

and their members of the benefits of free and open competition

for the purchase of those services. In short, the proposedtransaction may tend substantially to lessen competition in

violation of Section 7 of the Clayton Act, as amended, 15 U.S.C.

VI. REQUEST FOR RELIEF Plaintiff requests: 1. That the agreement to implement the proposedtransaction between North Shore and LIJ Medical Center beadjudged a violation of Section 7 of the Clayton Act, as amended,15 U.S.C. § 18, and Section 1 of the Sherman Act, 15 U.S.C. § 1; 2. That preliminary and permanent injunctions be issuedpreventing and restraining the defendants and all persons acting

on their behalf from entering into or carrying out any agreement,

understanding, or plan, the effect of which would be to allow

16North Shore and LIJ Medical Center to discuss or agree on termsoffered to managed care plans or to negotiate or contract jointlywith managed care plans; 3. That plaintiff has such other relief as the Court maydeem just and proper; and 4. That plaintiff recovers the costs of this action.Dated: June 11, 1997For Plaintiff:_______/s/___________________ _____/s/________________Joel I. Klein Zachary W. CarterActing Assistant Attorney General United States AttorneyAntitrust Division Eastern District of New YorkU.S. Department of Justice10th & Constitution Ave., N.W.Washington, D.C. 20530 David L. Goldberg (9891)(202) 514-2401 Deborah B. Zwany (7987) Assistant U.S. Attorneys Eastern District of New YorkA. Douglas Melamed One Pierrepont PlazaPrincipal Deputy Assistant Brooklyn, New York 11201Attorney General (718) 254-6055/7000